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Simulations on the Special Safeguard Mechanism

Simulations on the Special Safeguard Mechanism

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This paper aims to provide policy-makers, negotiators and other stakeholders with a clear technical assessment of how the December 2008 draft modalities (TN/AG/W/4/Rev.4) and the accompanying working document (TN/AG/W/7) could affect the functioning of the proposed special safeguard mechanism, and, in particular, accessibility of the mechanism and its effectiveness.

This paper aims to provide policy-makers, negotiators and other stakeholders with a clear technical assessment of how the December 2008 draft modalities (TN/AG/W/4/Rev.4) and the accompanying working document (TN/AG/W/7) could affect the functioning of the proposed special safeguard mechanism, and, in particular, accessibility of the mechanism and its effectiveness.

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12/24/2014

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Figure 4.1: Volume SSM Access Rates Under Various Trigger Modalities

10

R. Montemayor - Simulations On The Special Safeguard Mechanism:
A Look At The December 2008 Draft Agriculture Modalities

A so-called pro-rating procedure for computing
triggers has also been proposed to further
address concerns over the adverse effect of
SSM imposition on future triggers and access to
markets. This was incorporated in the second
sub-paragraph of Paragraph 3 of W7.

In one interpretation of this pro-rating proce-
dure, the average monthly volume of imports
during non-SSM months in each year is used
as a proxy, or substitute, for imports during
months when SSM was imposed during the
year.19

However, if the actual volume of
imports during a particular month was higher
than the proxy, the actual volume was used.
The adjusted import volumes per year were
then computed, and the totals for the three
years were averaged to come up with a new,
pro-rated trigger. Figure 4.1 above shows that
when this pro-rating modality using annual
proxies was applied, the access rate declined
to 14.4 percent.

The effect of pro-rating was less pronounced
if a single proxy was used to substitute for
imports during months when SSM was imposed
over a thirty six month period.20

Here, the
overall access rate averaged 15.2 percent,
still slightly lower than the baseline result of
15.9 percent, but almost a percentage point
higher than when annual proxies were used.
Of the countries covered by the study, only
Fiji appeared to be particularly vulnerable to
either pro-rating modality.

If the pro-rating modality using thirty six
month proxies was applied while suspending
the carryover rule, the overall access rate
reached 15.4 percent. This was slightly lower
than the result in the reverse (baseline)
scenario where the carryover rule was applied
without the pro-rating modality.

In general, the pro-rating modality tended
to increase the volume trigger over baseline
levels. Intuitively, this would make it harder
to breach the trigger and make use of volume
SSM remedies. In actuality however, the
higher trigger merely delayed the onset of the
breach in some instances, but once the trigger
threshold was breached, access to the SSM was

retained for essentially the same number of
months. This explains why overall access rates
seem to have not been affected significantly
by the pro-rating modality.

However, there were cases when a delayed
access to an SSM remedy had a greater impact
on access rates. If a product had a tariff rate
quota (TRQ) commitment and the imposition
of SSM spilled over to the next implementation
year due to a delayed breach of a higher pro-
rated trigger, SSM duties would have to be
suspended at the start of the succeeding year
until cumulative imports surpassed the TRQ
commitment. By the time imports exceed the
TRQ level in the succeeding year, a volume
surge condition may not apply any more. This
would preclude the re-application of SSM. In
effect, the portion of the imposition period
that spilled over to the succeeding year would
have been lost.

A similar situation could arise if the spillover
limit provisions (as discussed in Section 4.4)
were applied.

Some critics of the pro-rating proposal have
argued that irreparable damage may be done
to domestic industries if countries are unable
to promptly implement the SSM remedy in
response to an import surge. This is particularly
relevant for developing countries which have
weak import data gathering capacities. Delays
in validating the existence of import surges
are inevitable and will only be exacerbated
by higher triggers arising from the pro-rating
modality. In this regard, it should be noted
that the pro-rating modality will require a
disaggregation of import volumes by month,
whereas the carryover method involves a
simple averaging of annual import volumes.

It could be further debated whether an annual
or 36-month average for non-MFN months is a
suitable and accurate proxy for imports during
months when SSM was imposed. Imports may
have seasonal trends which cannot be captured
by simple averages.

In a recent submission21

, the G-33 also main-
tained that pro-rating was unnecessary since

11

ICTSD Programme on Agriculture Trade and Sustainable Development

the original modality for computing triggers
was already sufficient to sustain “normal
trade”: this was based on three-year averages,
and allowed the use of SSM remedies only if
cumulative imports breached the triggers by
a certain percentage. The G-33 pointed to
data showing that the annual growth rate in
imports of certain commodities did not exceed
single digits, and concluded that exporting
countries would have more than enough
leeway to expand their markets even if the
triggers were not pro-rated since imports
would have to exceed 120 percent of the
trigger before SSM duties could be applied.
They added that while imports could possibly
taper off once SSM duties were imposed, this
would happen only after imports had already
exceeded the three-year average import level
by more than twenty percent. On this basis,
they concluded that triggers in subsequent
years would not decline dramatically, and
normal trade and normal trade growth would
generally be preserved, even in the event of
an SSM imposition.

The G-33 further alluded to the experience with
the existing Special Safeguards (SSG) during the

Uruguay Round implementation period: during

this time, developing countries made use of the
measure sparingly. They pointed to instances
when imports did not decline, and in some
cases even increased, after the imposition of
SSG duties. The negotiating bloc reasoned that
developing countries would utilize the SSM in a

similar manner due to diffculties in promptly

collating trade data, domestic concerns about

food suffciency, and other intervening factors.

The G-33 reiterated that the SSM was supposed
to address import surges and price depressions
that adversely affected importing countries,
and could not be expected to simultane-
ously compensate exporting countries for their
ac-tual or potential losses arising from an
SSM imposition.

Obviously, the actual effect of a pro-rating
modality would depend on the behavior of

imports of each specifc commodity. If imports

for a certain product breach the volume trigger
early in the year, the subsequent trigger will tend

to be relatively higher because the proxies will
be used for a larger number of months. In turn,
some exporting countries have argued that their
access to markets with high import growth rates
will be seriously curtailed if SSM is imposed,
and that the pro-rating modality is necessary to
ensure that such access is reinstated even when

SSM is applied. Unfortunately, the study did
not have suffcient data to make a comparative

analysis of the impact of the proposed modality
on products with varying import trends. As
noted earlier therefore, any conclusions from
the analysis should be considered as merely
indicative and based exclusively on the historical
data available for the study.

Another proposed modality which was pur-
portedly intended to curb the unnecessary
application of SSM remedies is the so-called
cross-check mechanism.22

Paragraph 3 of W7
provided in particular that the volume SSM
would “normally not be applicable unless the
domestic price is actually declining”. This rule,
which was not present in Rev 4, arose from the
argument that there would be no urgent need
to apply remedial SSM duties if an import surge
was not causing a decline in domestic prices.

Different interpretations of the cross-check
rule were used in determining the effect of
the modality on the volume SSM. Figure 4.2
below shows that access to the remedy declined

signifcantly from the baseline level of sixteen

to only 6.1 percent if the SSM was allowed only
when the average monthly domestic price of
the product from the start of the year up to the
current month (year-to-date or YTD) was lower
than the average monthly domestic price of the
product in the preceding three years. If YTD
domestic prices had to be lower than the three-
year average by at least ten percent, the access
rate dipped further to 1.1 percent. A twenty
percent threshold for the cross-check effectively
rendered the volume SSM inaccessible.

Getting accurate and timely data on domestic
prices of specific commodities would presu-
mably be a major problem in most developing

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